Importance of Internal Controls in Corporate Governance

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Accounting principles and internal audit rules require that companies establish adequate and functional internal controls to improve corporate governance processes. These principles include generally accepted accounting principles and the Institute of Internal Auditors standards.

Internal Control Definition

An internal control is a set of instructions, guidelines and procedures that a company's senior leadership establishes to prevent operating losses resulting from theft, error, technological malfunction and employee neglect or carelessness. An internal control also helps a company prevent adverse regulatory initiatives, such as fines or litigation.

Corporate Governance Definition

Corporate governance consists of all mechanisms, technological processes and physical systems that department heads and segment chiefs put into place to make sure a company operates effectively. Governance tools include human resources policies and guidelines, as well as departmental work specifications. These tools may also include external elements, such as laws and regulations.



Internal controls play an important role in corporate governance systems. Controls help a company prepare accurate and complete financial statements at the end of each month and quarter. A firm may also hedge, or protect against, operating risks by implementing functional controls. These risks may relate to manufacturing activities and technological processes.



About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.

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